Are Some Customers Paying Too Much In Fees? The SEC Cracks Down on Linkbrokers

“Is my stockbroker charging me too much in commissions and fees?” This is a common question many investors frequently have. Unfortunately, all too often, the answer to this question is “Yes.”

In fact, just yesterday, the SEC announced that it had fined a New York based broker-dealer, Linkbrokers (an affiliate of London-based ICAP), $14 million for over-charging its customers in the form of markups (and markdowns), among other things.

Markups are the difference between the lower price a broker-dealer can buy an investment for and the higher price charged to a retail customer when they buy investments directly from the broker-dealer’s inventory, rather than on the open market. For example, if a broker-dealer were able to buy a stock at $10 per share and charge a retail customer $11 for that same share, the markup would be $1. Markups are common in the financial services industry, but to be acceptable, they must not be excessive and must be appropriately disclosed to the customer.

According to the SEC, from 2005 through February 2009, Linkbrokers did not properly disclose the markups and markdowns, nor were many of the markups (and markdowns) reasonable. Instead, Linkbrokers is said to have defrauded customers by claiming to charge them minimal commissions, while in fact charging them excessive markups that could be as much as 10-times what the customers believed they were paying. The SEC alleged that Linkbrokers charged markups that were as high as $228,000.

Linkbrokers also allegedly defrauded customers by using a version of a scheme known commonly as “cherry-picking.” Such a scheme involves trading for both customer accounts and “house” accounts, which hold the broker-dealer’s money. The cherry picker then chooses the profitable trades and assigns them to the house accounts, while dumping the losing trades into the customer accounts, causing the broker-dealer to profit and the customer to lose money.

Linkbrokers is said to have placed orders for customers to either buy or sell at a specific price, known as a “limit order,” and executed such trades accordingly. However, depending on how the market moved after that point in time, Linkbrokers allegedly bought or sold those positions back into the market at a profit, which it kept for its own house accounts. They then allegedly lied to the customers, telling them that the limit orders had never been executed, causing the customers to suffer losses.

Remarkably, too many stockbrokers and investment advisers continue to charge their clients excessive fees and commissions. Such conduct is against the law and against financial industry rules. Investors who have been charged excessive fees and commissions may be entitled to a return of some or all of the commissions and fees paid in the account, along with a reimbursement for some or all of any losses that were suffered in the account as well.

If you believe that you may have been charged excessive fees or commissions on your investment account, contact an attorney at Malecki Law for a free consultation to find out if you may be entitled to recover some or all of your losses. The attorneys at Malecki Law have decades of experience representing investors.